Posts Tagged ‘MBSQuoteline’

A stronger than expected Employment report on March 6 pushed mortgage rates up to the highest level of 2015. Since then, however, nearly all of the news, both globally and in the US, has been favorable for mortgage rates. In Europe, the European Central Bank (ECB) began its sovereign bond purchase program on March 9. The added demand from the ECB has helped push bond yields lower around the world. In addition, Greek and eurozone officials have made little progress in agreeing to terms for the Greek aid package. This caused investors to shift to safer assets, including US mortgage-backed securities.

In the US, the major economic data released since the Employment report has been weaker than expected. Retail Sales, Industrial Production, and Housing Starts all have fallen well short of the consensus. Since slower growth reduces expectations for future inflation, this economic data has been good for mortgage rates. Finally, the largest improvement in mortgage rates took place on Wednesday after the release of the Fed statement. Fed officials downgraded their outlook for the economy and inflation, causing investors to push back their expectations for the timing of federal funds rate hikes.

The Wall Street Journal reported that during tomorrow’s European Central Bank (ECB) meeting the executive board of the ECB will recommend to the entire 25-member governing council a plan to begin a sovereign bond purchase program. The plan, which would be similar to the quantitative easing (QE) program used by the US Fed in recent years, would call for purchases of 50 billion euros (about $58 billion) per month for a minimum of one year. These figures are roughly in line with investor expectations, and the reaction in MBS markets has been small so far. If the governing council adopts this plan tomorrow, the impact on MBS may be small.

The FOMC statement and Fed Chair Yellen’s press conference has created some volatility, but resulted in just a small net reduction in MBS prices. The statement included some change in language but Yellen pointed out that it did not “signify any change” in the Fed’s “intentions” for monetary policy as indicated in prior statements. The phrase “considerable period” remained in the statement, and the term “patient” was added to describe the Fed’s attitude in changing monetary policy. The forecasts from Fed officials for the pace of future fed funds rate hikes were lowered a little from their forecasts at the September meeting. Yellen said that the Fed is unlikely to start raising the fed funds rate for “at least the next couple of meetings”.

The Fed’s view is that the economy is improving and that the slack in the labor market is diminishing. According to the Fed, the downward pressure on inflation from lower oil prices is “transitory” and will have little impact on long-run inflation levels. Yellen emphasized that future monetary policy will remain heavily dependent on incoming economic data.

One reason that mortgage rates are so low is the expectation that the ECB will begin to buy sovereign bonds, similar to the recently completed US quantitative easing (QE) program. Economic growth in Europe has stalled, and QE is one of the most powerful tools available to the ECB to help boost growth. The expected added demand for bonds from the ECB has caused bond yields around the world to decline. However, ECB officials are divided about QE, and the decision keeps getting pushed farther into the future. Notably, the Germans are opposed. At Thursday’s press conference, ECB President Draghi appeared to take another small step in favor of QE. Draghi said that the ECB intends to increase the size of its balance sheet and that it would do so even without unanimous consent. However, he also deflated hopes for quick action by saying that the ECB would not consider QE until the end of the first quarter of 2015. The net impact of his comments was a small improvement in mortgage rates.

The recently released Fed Minutes and testimony from Fed Chair Yellen have provided more detail in some areas about future Fed policy. There are two primary tools that the Fed is currently using, bond purchases and the fed funds rate.

Bond purchases from the Fed, which include both Treasuries and mortgage-backed securities (MBS), exert a direct influence on mortgage rates. The added demand for MBS from the Fed raises MBS prices. Since mortgage rates are set based on MBS prices, this helps keep mortgage rates low. The Fed’s portfolio of MBS has been growing at a scheduled pace as the Fed has been reinvesting principal payments received and adding new MBS. The Fed has been tapering its bond purchases, though, and the Minutes indicated that the purchases of new MBS will end in October as expected. After that time, the Fed plans to continue to reinvest principal payments received, which will hold the size of its portfolio steady, at least until the first fed funds rate hike. Principal payments have been averaging $16 billion per month, so investors were pleased that the reinvestment will continue for quite a while.

The fed funds rate, a very short-term interest rate, has a less direct effect on long-term mortgage rates than MBS purchases, but lower short-term rates generally help hold down longer-term rates as well. Fed Chair Yellen has provided no specific guidance about the timing of the first fed funds rate hike. She has emphasized that future policy decisions will be dependent on the performance of the economy. She expects that the economy will expand at a “moderate” pace for the next several years. Fed officials are particularly concerned with the strength of the labor market. The consensus is that the first fed funds rate hike will take place during the middle of 2015.

At the beginning of the year, a change was made to allow the Producer Price Index (PPI) to capture a wider range of items. PPI now focuses on the increase in prices of intermediate goods AND services used by companies to produce finished products. Services were not included before this year. One result of the change was to make the data more volatile month to month. Investors likely will look at longer-term trends in PPI, but they may not react much to monthly changes, as was seen today. To determine trends in inflation, investors rely more heavily on the Consumer Price Index (CPI), which measures price changes for finished goods, and the Core PCE price index, which is favored by the Fed.

In a long awaited speech this morning, new FHFA Director Mel Watt laid out several changes in the direction for Fannie Mae and Freddie Mac from that proposed by former Acting Director Edward DeMarco. The most significant of which deals with loan limits. Watt will not force the Agencies to reduce their current loans limits, as DeMarco had planned. In addition, Watt proposed a renewed focus on expanding credit availability, loosening rules requiring loan buy-backs, and said he will seek public input before any increase in guaranty fees.

In a speech this morning, Fed Chair Yellen said that Fed officials widely share the view that further improvement in the labor market is needed before the Fed should begin to raise the fed funds rate. According to Yellen, the US economy is still “considerably short” of the Fed’s goals. She emphasized several measures indicating that considerable slack remains in the labor market. The labor force participation rate remains low by historical standards. A lot of people who could be working have become discouraged by their lack of success in finding a job and have stopped trying. Seven million people are working part-time, and many of them would prefer to be working full-time. A large number of people have been unemployed for six months or more, which looks bad when applying for jobs. The JOLTS data shows that few people are quitting their jobs voluntarily. When the labor market is stronger, people typically are more willing to risk seeking better opportunities. Finally, wage gains have been small. Yellen’s comments suggested that the Fed may wait longer than expected to raise the fed funds rate, which lifted stocks and had little lasting impact on MBS.

The Ability-to-Repay (ATR) and the Qualified Mortgage (QM) rules are in effect as of January 10. It seems a little late, but yesterday a Subcommittee of the House Financial Services Committee held hearings to consider how the new rules will harm current and prospective homeowners. Representatives from the lending industry spoke about the limiting effect these rules will have on credit availability, especially on credit for low to moderate income borrowers. Committee members are considering proposed new laws to modify these rules.

Over the weekend, incoming FHFA Director Mel Watt stated that as soon as he is sworn in, he intends to delay the implementation of the loan-fee increases as were recently announced by outgoing Director Edward DeMarco. It is believed that the delay will cover increases to both the guaranty fee and the loan level price adjustments. It was not clear if Watt’s announcement meant he will also delay DeMarco’s planned elimination of the .25% Adverse Market Delivery Charge (for all but four states). Watt said he needs time to “evaluate fully the rationale for the plan”.